How Do Investors Value a Startup?

Startup valuation is a technical procedure whereby the investors find an amount of money that market is ready to pay for a business. For an entrepreneur, it is vital to know the process of startup valuation, so they can pitch the investors rightly.

Startup valuation is a bit different than that of valuation of a mature company as it involves more uncertainty and higher risk.  So, financial data is important, but along with financial status, you must also consider the other qualitative and quantitative aspects of your business.

startup valuation

This article will discuss all those factors which investors consider to determine the value of a startup.

1- The Idea:

The first thing investors look for in a startup is the idea behind the business model. So, to make it convincing for the investor, you must identify the problem that your startup solves and explain how exactly it does so.When is the Best Time to Raise Money for My Startup 1

2- The Market Size:

In market size, the investor actually sees the opportunity. The bigger market size you have, the faster investor will credit the amount. However, money should also come faster, if your product is highly valuable to a smaller segment, but has high demand. In other cases, if it’s a super-hot idea but does not have much market, the investor will take time or you may also get an instant rejection.

market size

3- Competition:

How many competitors there are and where do they stand. Why should the investor invest in a startup owned by you and not in your competitor’s! How tough the competition would be in one year, five years and so on.

This is to be dealt strategically in your business plan, i.e. you must figure out the competitive advantage first and then mention in explicitly in your business plan.

competition

4-The Stage of Development:

The development stage of a startup is important for investors. Maybe, no one is interested when it was in ideation, but as soon as you got a beta product, it starts attracting the attention. Analysis of the development stage, partnerships in place, resources, partnership and funds needed must be the part of the business plan that you will use to pitch the investors.

stage of development

5- The Team:

Yes, it matters for the investors. They do consider the potential and achievements of the team. After all, they want to be sure that their money is in right hands. So, make sure to include an impressive startup team section in the business plan. If it’s the first venture of the team and no one has an achievement yet, you may include the details of your university projects, volunteer work or something where you gave back something to the community!

how-to-sustain-team-productivity

The above-discussed elements are the crucial points that must be communicated clearly and effectively in the business plan.

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